Nintendo cuts revenue and operating profit guidance, increases year end dividend

Pokemon Go may not have been the powerup investors expected.

18

Nintendo's stock is currently trading down 5% in Germany on the news that they lowered their full year sales and profit forecast for the fiscal year ending in March, 2017. 

Please take a look at the revised guidance.

Nintendo lowered their full year revenue guidance by 30 billion yen to 470 billion yen, a 6% cut from their previous forecast. Nintendo also expects operating income to be 15 billion yen less than their prior guidance, a 33% decrease. The real shocking slash was to the company's operating income expectations. Nintendo now expects to generate only 10 billion yen of operating income versus a previous forecast of 45 billion yen. That 77.8% decrease in the forecast has spooked a lot of investors. 

It's not all that bad, fellow shareholders. Nintendo sold part of their stake in the Seattle Mariners earlier this year for $661 million. That one time gain has actually caused the company to forecast net income of 416.22 yen per share for the full fiscal year. Net income grew 234% year over year in the first 6 months of the fiscal year in spite of all of the cross currents the company currently faces. Nintendo forecasts full year over year growth in net income of 203%, largely driven by the sale of the Mariners with some help from Pokemon GO. Revenues dropped to 136.812 billion yen, down 33% year over year for the first half of Nintendo's fiscal year. That tremendous sales shortfall has pushed Nintendo back into an operating loss of 5.947 billion yen for the first half of the fiscal year. The board of directors also announced that there would be no dividend for the mid year due to the company operating at a loss. It isn't all bad for shareholders that are willing to hold on until the launch of the Nintendo Switch as the board also announced a 40% increase to the full year dividend payout to 210 yen per share from 150 yen per share in the prior year. The stock's dividend yield is approaching 1%, which probably doesn't feel too great considering shares are down over 10% since the Switch reveal.

Nintendo addressed the cuts to their forecast: 

"The Company modifies its financial forecast in consideration of a stronger-than-expected yen in foreign currency exchanges, sales performance for the six months ended September 30, 2016, the revision of sales prospects after the second quarter, and gain on sales of investment securities totaling 62.7 billion yen recorded as extraordinary income for the quarter since the Company's wholly-owned subsidiary, Nintendo of America Inc., has sold a part of its ownership in the company that manages the Seattle Mariners Major League Baseball team."

Nintendo assumed exchange rates after the second quarter and at the end of the fiscal year have been revised from 110 yen to 100 yen per U.S. dollar and from 125 yen to 115 yen per euro. The refrain of a strong yen headwind is nothing new to NIntendo shareholders, but the drop in sales is due to scarcity and weakness in the overall software offerings this year at the company as well as a reduced expectation of hardware sales leading up to the launch of Nintendo Switch. 

What about Pokemon GO? Well Nintendo's share of profit from the mobile phone app amounted to 12 billion yen. Before all the doomsayers rain on shareholders' parade, it is important to note that Nintendo is only expecting to generated 10 billion yen for the whole fiscal year from operations. Pokemon GO has generated more profit for them in one quarter than the company will generate from operations this fiscal year. This highlights the power of Nintendo's entrance into the mobile space and lays the groundwork for Super Mario Run to add yet another source of income to a company that is clearly at a crossroads.

Nintendo President Tatsumi Kimishima said the company expects to sell 2 million units of Switch in its first month after it goes on sale in March of 2017. This is accounted for in today's revised guidance. Many analysts panned Nintendo's Switch trailer and have already declared the device DOA. The company has stated that they didn't tell us everything about the system, so I will reserve my judgement until I have all of the facts. Many of the rumors have proven to be true. The system has detachable controllers and is a tablet with a dock. Another rumor was that Nintendo new controllers may also support mobile phones such as iPhone or Android devices. It remains to be seen if there is some haptic technology on the touchscreen of the Switch as well. There are too many unknowns for any reasonable person to make a definitive statement on the viability of Nintendo's new hybrid console in a rapidly changing marketplace. I also don't think it is a coincidence that Tim Cook, CEO of Apple Inc., happened to visit NIntendo Headquarters in Kyoto, Japan a week before the Switch was revealed. 

Nintendo has a lot of new streams of revenue and profit that are going to come online in the next year and beyond. Their continued efforts in the mobile space, upcoming amusement park, and video content offerings are frequently overlooked by many analysts. The future of the company casts a much wider net than Nintendo Switch by itself. It is that "Blue Ocean" strategy that has kept this company going since 1889. Their ability to pivot may prove to be their greatest asset.

Full Disclosure:

Asif Khan, his company Virtue LLC, and/or his family members had the following positions at the time of this article:

Long Apple via shares and options

Long NTDOY shares

CEO

Asif Khan is the CEO and majority shareholder of Shacknews. He began his career in video game journalism as a freelancer in 2001 for Tendobox.com. Asif is a CPA and was formerly an investment adviser representative. After much success in his own personal investments, he retired from his day job in financial services and is currently focused on new private investments. His favorite PC game of all time is Duke Nukem 3D, and he is an unapologetic fan of most things Nintendo. Asif first frequented the Shack when it was sCary's Shugashack to find all things Quake. When he is not immersed in investments or gaming he is a purveyor of fine electronic music. Asif also has an irrational love of Cleveland sports.

From The Chatty
    • reply
      October 26, 2016 5:19 AM

      Not sure how these types of articles are doing traffic wise, but I really appreciate and enjoy them.

      • reply
        October 26, 2016 6:55 AM

        I like them too. I definitely want to learn more about finance and investment. I have limited experience with it from school, but this is more interesting since its about tech and gaming companies.

        • reply
          October 26, 2016 11:22 AM

          I am working on a new feature that you are gonna love!

          • reply
            October 26, 2016 11:24 AM

            Briefcase man do you think ESPN will continue to drag down Disney? It seems like movies and parks are really strong and will continue to be but I don't know if we have a bottom for ESPN.

          • reply
            October 26, 2016 11:25 AM

            Finance listicles?

          • reply
            October 26, 2016 11:52 AM

            Awesome!

      • reply
        October 26, 2016 11:02 AM

        Thank you! They do decent traffic but I view them more as informational pieces for our regular readers.

        • reply
          October 26, 2016 12:19 PM

          Can you become the video game stock guy so Pachter can go away forever.

          • reply
            October 26, 2016 12:30 PM

            THIS!!!! So much this!!!

            I cannot, for the live of me, understand how one man can be so wrong, so often, and still be so lauded by the industry. He's published predictions are seriously no better than the educated speculation you could read in chatty.

            • reply
              October 26, 2016 1:55 PM

              They're worse. Anyone who said that Blockbuster would beat Netflix, as he did, would have gotten shackpiled really badly

          • reply
            October 26, 2016 2:11 PM

            This idea came across my mind the other day lol

      • reply
        October 26, 2016 2:03 PM

        Same. Really good stuff.

    • reply
      October 26, 2016 11:22 AM

      So in this type of situation, do they increase future dividends in order to entice people to stay on during bad times? If so, do they then lower dividends later?

      I do love that picture from Tim Cook's tweet. Anything that has Miyamoto in it always makes me smile because he always seems like such a happy person.

      • reply
        October 26, 2016 11:23 AM

        This is a good question I was wondering the exact same thing

      • reply
        October 26, 2016 11:53 AM

        I think that is what they are trying to do, but upset investors who are down more than 10% in a week may not care about a 1% dividend yield unless they also believe the stock has upside from here.

        • reply
          October 26, 2016 12:14 PM

          I'm trying to be patient with their stock but man is this getting more and more difficult. Especially if they announce Switch specs and a pricepoint that are super disappointing. I need to hold on long enough until at least a few big titles besides Zelda come out.

          • reply
            October 26, 2016 12:19 PM

            I honestly think they're going to have HUGE success with the switch. This is based on what I see IRL opposed to internet chatter.

            • reply
              October 26, 2016 12:22 PM

              Based on intuition?

              I love the concept, but the reaction from a lot of gamers these days are simply whichever one is most powerful is the one to have because it can have the best [whatever], which I think might dampen sales just like it did on the Wii U.

              With the U, they played coy about specs and price to the point where the entire conversation was already about how underpowered it was before they even announced those things, which I feel is part of why it flopped. I'm worried the same thing will happen this time - they expect hype, but get skepticism which builds into pre-conceived opinions that later get super confirmation bias.

              • reply
                October 26, 2016 12:25 PM

                Assuming the video is to be believed. They have a new mario, new zelda, and a new mario kart for the system. Let's say for a second these are all launch games. Do you really think a gamer who has the money would just say "Naaa man, I'm good?" That plus the eventual new pokemon game............ Yeah, nintendo are going to be just fine. The only way they could fuck it up is by adding a bunch of shit that no one wants like motion controls etc.

                • reply
                  October 26, 2016 12:30 PM

                  I should be clear in that I really want them to release something awesome and at this point am a tentative yes in purchasing it.

                  That being said, we've seen that good first party titles will only drive console sales so far. I agree that if all those are launch titles (which I very much doubt they will be), it'll drive initial Nintendo fan sales, which could then become a chain reaction with 3rd parties investing in it (more than they already are?) and that driving others to get it. But it's certainly not a given. Also there are a good amount of gamers who don't necessarily like first party Nintendo games. Just look at the Switch thread from the other day and you'll see some examples.

                  And I think it's interesting you chose motion controls as the example of 'bunch of shit no one wants' because the Wii was a commercial success largely based on that ability.

                  • reply
                    October 26, 2016 2:23 PM

                    Plus Splatoon and Zelda make excellent use of the gyros. I think he means "gimmick" use instead of enhancements to core things like aiming.

                    Its launch lineup is everything. Wii was a hit not just because of accessibility or price, but because it launched with Zelda and Wii Sports. The Wii U had huge gaps in software releases for the first 18 months. By the time the library had come into its own the time to strike had passed.

                    Kimishima claims that having enough games for launch is one reason why they pushed the Switch launch to March. We'll see if that holds true or not. Nintendo are up there with Blizzard and Valve in terms of sitting on games until they feel that they're done, so we'll see.

                    People are certainly interested though. In less than a week the Switch reveal has over half the number of views and 6x as many likes as the PS4 reveal from almost four years ago, it was top trending globally on Twitter, it was top of r/games, and it was even top of r/pcmasterrace. This was on the same day as the RDR2, GotG2, and Logan teasers.

                    They have everyone's attention, now they just have to not fuck it up.

    • reply
      October 26, 2016 4:09 PM

      Why is it down specifically in Germany?

      • reply
        October 26, 2016 10:46 PM

        The news came out when the stock was not trading in Japan or the US. It traded in Europe on the news first.

Hello, Meet Lola